We are approaching the one year anniversary of our first conscious steps to financial independence. In a little over a month, we’ll check our annual performance. I’m fairly confident we’ll hit all the targets. Mostly though, I’m excited to set better goals for next year. I can’t wait to write about THAT.
Still, it’s important to document our first steps and how we learned along the way. I learned a lot from reading other’s goals and want to be transparent about the learning, successes, and missteps along the way. Too many pretend they have it figured out from the start. We certainly didn’t! Here are our first year goals on the path to financial independence.
Setting the Stage
I had just discovered the possibility of financial independence through a few readings. I’d asked Teacher F.I. to do some reading. She had agreed to sit down and talk financial goals over a bottle of wine. We went out to dinner, ordered wine, and started talking about possibilities. We’d done some budgeting in the past, had a rough net worth calculation, and had set specific short term saving goals for individual purposes before. But, in over 15 years of marriage, we’d never really talked about our overall financial picture or long term goals. Amazing, right?
We quickly agreed that we wanted to ensure we wouldn’t have to work forever. In our profession, people who hang on for financial reasons often grow bitter and ineffective at their jobs. We had long ago agreed that we’d never let the other go down that route. The kids deserved better. But, we never really had a plan to avoid it. This was important to us, so we set a target date for potential early retirement.
Our Starting Point
In full transparency, we are starting from a place of privilege. This isn’t one of those miraculous stories where we had to dig out of hundreds of thousands of dollars of debt. Nor had we been spending every penny we earned. We were not careful with our money, but we also had not been totally reckless.
We started as two young teachers, making very little and grinding away at student loan debt. Over time, our income had grown through climbing the education career ladder: joint income has more than doubled in ten years. We’d suffered some lifestyle creep, but had saved or invested some of it. We made less-than-optimal home purchases, but fortuitous timing kept those from being financial disasters.
Just a few months prior to our goals, we had made a significant purchase that left us temporarily cash poor. The exact details of this purchase are the subject of a whole other post. Suffice to say, it wasn’t a particularly financially wise move. It wasn’t financially stupid either. That actually sums up our whole financial approach pretty well. We avoided major mistakes, but were far from using our money wisely.
In short, we were two middle-class professionals on pace for a comfortable retirement in our mid-60s. The system was working as designed.
We were about to take our first stumbling steps towards breaking free…
Our Year 1 Goals for Financial Independence
GOAL 1 – Savings
Establish and maintain a $10,000 savings account for liquidity. This was a somewhat arbitrarily chosen amount, but we’d been comfortable with it in the past. Now, we formalzied it.
This was an additional $4300 from what we had in cash at the time.
GOAL 2 – Retirement Accounts
Sadly, we hadn’t been maxing out our 403(b) accounts. We’d fallen into an all too common trap of trusting our pensions. (See 9 Reasons Educators Aren’t Wealthy)
For those who aren’t familiar, the 403(b) is a public school employee version of a 401k. You can make pre-tax contributions up to an annual allowable amount. In 2017 this amount was $18,000. Both TFI and I qualify, making a total allowable contribution of $36,000. We had only contributed $15,000 total, and had done less in previous years. (Trust me, I’m embarrassed by this now.)
The allowable contributions for 2018 were $18,500 per individual. That meant we could contribute a total of $37,000. Fortunately, both of us have access to Vanguard funds for 403(b) contributions. Mine have always gone into VTSAX. TFI chose to place hers in a Target Date fund for easy diversification. She wanted to be diversified but more aggressive, so chose a target date fund 10 years beyond our actual target date.
Our goal of $37,000 was an increase of $22,000 over our previous year amount.
GOAL 3 – Emergency Fund
Create an emergency fund of $30,000. This, combined with the savings from Goal 1, would place us in the ballpark of 6 months of expenses that seemed to be a common recommendation. (I hadn’t yet read Big Ern’s thoughts on an emergency fund.)
We planned to build this up by automatically saving $2500 a month. We’d use an online savings account to earn higher interest than traditional savings accounts. You can easily search best online savings accounts to compare rates and bonus offers. (Note: We ended up going with Discover because of the decent rate and an instant bonus, combined with a mobile app that was easy to use. This is not an affiliate link, just information.)
Th goal amount was equivalent to what we had saved the previous two years to make that big purchase I mentioned earlier.
So, this $30,000 was a new allocation of savings we had already started, for a net adjustment to our spending or saving of $0.
GOAL 4 – Pay Down Mortgage
We wrestled with the common question or paying down our mortgage or putting any excess we could carve out into investments. Our mortgage was the only debt we carried, but we loved the idea of eliminating that completely. Of course, I also knew what the math said about the benefits of investing over paying down low interest debt.
In the end, we decided to take a hybrid approach. We believed we could carve out an additional $25,000 of savings. We chose to add half of this to principal paydown of our mortgage. This meant an additional payment of $1041 each month.
Fortuitously, this principal paydown would result in our mortgage being paid off the year before our target early retirement date. It wasn’t entirely coincidental – this calculation led us to finalize the 50/50 split between mortgage/investment.
The additional mortgage paydown was $12,500.
GOAL 5 – Taxable Investments
We already had some small taxable investment accounts. Once, several years ago we had started a small taxable account auto-funded with an annual raise we had received. I also had purchased a few single stocks when we had a bit of extra savings. Haphazard, and negligible.
We committed to getting systematic and opened a taxable Vanguard account by depositing $3000 to VTSAX. Our goal was to deposit an additional $9500 here by the end of the year. In future years, the $2500/month currently allocated to the emergency fund would be automatically deposited in this taxable account.
Our goal for the year was a total of $12,500 to this account.
Financial Goal Summary
We had our first set of goals! They would require us to create more than $53,000 in new savings. A portion of this would be accounted for by the 403(b) contributions being pre-tax, so it didn’t all need to come from spending. Still, more than doubling our savings was a huge stretch for us!
I also note again that these numbers show we are working from a place of privilege. These numbers would have been unthinkable for us a decade earlier. But, because we had failed to start early, we now had significant catch-up to do. Fortunately, we had worked hard to have the income that enabled us to be more aggressive.
Additional Goals – Non Financial
Learning Goal 1 – Understand Our Spending Better
We believed carving out the additional savings was possible based on what we knew of our spending. This was largely will and optimism. The truth is, we had never been intentional about our spending and depended on the fact that neither of us was extravagant. (We weren’t frugal either!) Hitting our goals would require us to become much more focused. It might even help us stretch farther!
Learning Goal 2 – Credit Card Rewards
We knew we were not maximizing credit card rewards. We don’t carry a balance and have one airline card we like. I knew there were strategies for cash and travel rewards we hadn’t taken advantage of, but had spent exactly zero time learning about them. Knowing this could be another support on our journey, we vowed to spend the time. By the end of the year, we would identify one new card that would support our goals.
Did we make it?
There you have it – those were our first goals on our FI path. We set them in 2017. In December, we’ll do our review and I’ll publish the results. For some spoilers on our progress, or more detail on our first year, check out this post.
I can’t wait to improve our goals using everything I’ve learned from the FI community this year. Let me know if you have any feedback or questions in the comments below or contact me.